Suspension of IBC during COVID-19: A mere mask while what is needed is a vaccine
The IBC regime in India has come a long way since its inception, it has been constantly tested and has developed significantly over a period of time. Due to this pandemic, the Indian economy will suffer a severe impact and will ultimately lead to its unprecedented collapse. According to IMF this pandemic global recession will be ‘way worse ‘than the 2008 crisis which in turn will financially overburden the companies and push them over the edge causing the businesses, small or large to go bankrupt.
Micro, Small and Medium Enterprises (MSME) – The backbone of India
In India, while all businesses, small and large, are significantly affected by the pandemic, MSME is the worst-hit sector. The Government has taken several steps to protect and ameliorate the same in order to reduce the burden on MSME’s –
Hon’ble Finance Minister Nirmala Sitharaman pronounced that –
- Fresh initiation of insolvency proceedings under sections 7, 9, and 10 of the IBC will be suspended for a period of 1 year.
- Covid-19 related debt will be excluded from the definition of ‘default’ defined under section 3(12) under the IBC for the purpose of triggering Insolvency proceedings.
- A special insolvency framework will also be promulgated under section 240-A of IBC for MSME which is among the hardest hit due to the COVID-19 induced lockdown.
While the steps taken by the government is in the right direction and is a silver lining for the corporate debtors but it comes as misfortune to creditors of the corporate debtor. The blanket ban defeats the objective of IBC which is to provide for a time-bound manner for maximization of value of the assets. The Code was introduced with a creditor-in-control regime but the suspension connotes the exact opposite, making the debtor-in-control.
The suspension will cause undue delays because the financial creditors and the operational creditors will have to go through extensive litigation to recover any dues. Operational creditors will suffer more, they will be stuck, making them financially overburdened and henceforth they will not be able to repay their creditors causing the cascading effect which will continue and distress the financial system even more.
The suspension of section 10, in which the corporate Debtor applies for insolvency of itself, has been done without providing for an alternative relief mechanism and it will benefit the wilful defaulters in escaping liability, during the period for which the IBC is out of the picture.
Once the suspension is uplifted there will be a surge in the number of cases being filed with the Adjudicating authority which will overburden it. This will affect the resolution process ultimately resulting in resolution plans to have lower valuations which will be detrimental to the interest of the creditors, which again is in contradiction to the object with which IBC was formulated.
Position in other countries
During the present scenario, other countries have also taken similar steps regarding the insolvency and bankruptcy laws-
- United Kingdom – The UK government issued a temporary ban on statutory demands and prohibit winding-up petition and also on all winding-up petitions and orders were non-payment of COVID-19 related debt.
- Singapore– Monetary threshold to trigger insolvency has been increased and the time period to satisfy or set aside a statutory demand is increased from 21 days to 6 months.
- United States– President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which provides effective bankruptcy relief to small businesses and individuals, the threshold for filing for insolvency has been increased.
- Australia – The Coronavirus Economic Response Package Omnibus Act 2020 (Response Act) the government made various amendments which are temporary in nature for the COVID period in which they have provided for relief by increasing the threshold for initiation and increasing the deadline from 21 days to 6 months for a company to respond to a creditor’s initiation of the bankruptcy.
- Belgium – They have introduced a moratorium on insolvency proceedings.
- Germany – The Federal Ministry of Justice and Consumer Protection has suspended the obligation to file for bankruptcy within 21 days since it has become insolvent.
- Russia – Moratorium has been imposed on bankruptcy proceedings.
While the other countries have a proper framework for the resolution of insolvencies for different categories of business, India is yet to formulate one.
The government has provided leeway to the corporate debtors and protected viable businesses from being pushed into early insolvency but has not taken into consideration the various intricacies as mentioned above.
What is needed is a framework that caters to the creditors and corporate debtor on the same footing. This can be done by categorizing the businesses and having different provisions for each of the categories in relevance to their specific needs.
When the suspension is uplifted the government will have to make sure that the rights of the creditors are duly taken care of and the consequences of the suspension shall be dealt with, in a proper manner. Otherwise, it would result in defeating the core purpose of the IBC for which it came into existence.
COVID-19 (TEMPORARY MEASURES) ACT 2020
The Coronavirus Economic Response Package Omnibus Act 2020 (Response Act)
The insolvency and bankruptcy code, 2016
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